Effective Product Control. Nash Peter

Populating the GL with any necessary financial accounting entries.

      As product control cover a substantial portion of the control framework assigned to finance, the bank benefits from a single team monitoring all aspects of the desk's financial performance (i.e., the P&L, balance sheet and financial reporting). This set-up should ensure both the P&L and balance sheet are aligned and that by seeing the full financial picture, issues are more readily identifiable.

      The main drawbacks of this structure relate to the breadth of responsibilities being undertaken. As the product controller needs to be skilled in many more disciplines than the P&L-only function, it can be more difficult to recruit and develop talent. Additionally, so many responsibilities may cause some to be neglected.

      As before, these drawbacks can also be compensated for by having clear roles and responsibilities and complete standard operating procedures.

      For the purposes of this book we will focus on this type of product control function.

      Skills, Qualifications and Experience

      Product control has historically employed candidates with varying levels of experience but one of the most common recruitment styles of banks has been to employ candidates who, after completing three years of work experience in an accounting firm and passing their accounting exams, have qualified as chartered accountants. These chartered accountants would then be brought into the product control function and be trained up to control the sales and trading desks.

      Over time, these candidates would gain the necessary experience to move through the product control ranks by becoming senior product controllers and then product control managers.

      Accountants who, for various reasons, have decided not to train in accounting firms are also very prevalent in the product control ranks. These candidates commonly spend their qualifying period working within the financial services sector at banks, fund managers, credit rating agencies and so on. This means they have different, but equally valuable, experiences to bring to product control.

      Once in product control both sets of candidates can further their qualifications and skills by taking postgraduate courses.

Table 1.1 lists the product control hierarchy and the typical experience, qualifications and skill sets that you could expect to see in any bank.

Table 1.1 Qualifications, experience and technical skills

      Note: Corporate titles will vary across the industry

      VH = very high, H = high, M = medium, L = low.

      The depth and breadth of experience and skills, which product control provides, can open many opportunities within banking. Prior to the Jérôme Kerviel and Kweku Adoboli rogue trading events, these opportunities included transfers onto the trading desk. These transfers are now very rare due to the risks they pose to the bank. More commonly, many product controllers transition into chief operating officers (COOs), chief financial officers (CFOs) and operational risk executives.

      On the flip side, given the broad set of technical skills required to advance through the ranks in product control, it is more difficult to enter the field later in your career if you do not already have these skills.

      Organizational Structure

      Product control sits within the finance department and is aligned to support the business. Product control's most senior appointment is the global head who, in addition to setting the agenda for the work performed by their team, will interact directly with the bank's markets CEO, who is the head of the trading floor.

      In addition to the overall global head of product control, the division has global heads responsible for each line of business and it is their responsibility to represent product control to the respective heads of those businesses.

Using Figure 1.3 as an example, there are heads of product control for credit, foreign exchange, rates, commodities and equities. These heads are responsible for supporting and controlling the business they are aligned to.

Figure 1.3 Finance and product control organizational structure

      The teams of product controllers supporting and controlling the sales and trading desks for their business are usually consolidated into regional hubs where the traders are located. Sales staff, however, will be dotted all around the world as they are not limited to the regional hubs that exist for traders. The sales trades will be booked from the local offices and then risk managed in the regional hub by the trading desk.

      In Figure 1.3 the regional hubs are Europe, the Middle East and Africa (EMEA), the Americas (both North and South America) and Asia.

      The regional product control hubs will typically have managers for each line of business (e.g. credit, rates, etc.) in addition to a manager for the country (e.g. head of product control Singapore). The product control country manager will typically report directly into the country CFO (e.g. Singapore CFO) and will have an indirect reporting line to the global head of product control. They can also have indirect reporting lines to the heads of product control for each line of business.

      There are exceptions to every rule and, in some cases, product control will not be based in the same location as their traders. For example, a small rates desk operating out of Sydney could be controlled by a regional product control team located in Singapore.

      In addition to these teams, there is usually a separate product control team that is responsible for valuations. In rare cases, this team sits within market risk or alternatively may still sit within finance but report directly to the CFO or financial controller.

Valuations, or valuations control as they are also known, are responsible for a range of activities related to the valuation of financial instruments. Some of the common responsibilities for this team are illustrated in Figure 1.4 and they are outlined here:

      • Rate capture: Rate capture is the sourcing of end of day rates which are used to revalue the desk's open positions. This doesn't always sit with valuations and can reside within the business, operations or in market risk.

      • Bid offer and XVA (comprehensive valuation adjustments): Bid offer and XVA are the valuation adjustments required to bring the desk's portfolio to its fair value. We will look at valuation adjustments in more detail in Chapter 16.

      • Independent price verification (IPV): IPV checks that the end of day prices align to fair value. We will look at IPV in Chapter 15.

      • Prudential valuation: Prudential valuation is relatively new and isn't applicable in all jurisdictions. This work requires the valuations team to quantify additional valuation adjustments stipulated by the prudential supervisor, such as illiquidity and concentration risk.

      • Fair value hierarchy (FVH): FVH allocates the bank's financial assets and liabilities into three levels depending upon price observability and market activity.

Figure 1.4 Remit of valuation control

      In addition to these activities, valuations will work with the line product controllers to review and validate the day 1 P&L for significant or exotic new trades. And when a new product is proposed by the business, valuations will assess the product from a valuations perspective.

      The Desk

      A bank maintains separate desks to cover each line of business (FX, rates, credit, etc.). This structure allows the bank to tailor skill sets and focus on the specific markets and financial instruments for each line of business, which benefits the clients and the bank.

      For example, the FX desk will only be responsible for pricing client trades and taking discretionary